Finance

How to Recession-Proof Your Finances: A Step-by-Step Guide

By Laura Gariepy

You’ve probably heard about a possible recession on the horizon. If that talk scares you, take a deep breath, and know you can prepare for economically tough times. In this article, we’ll walk you through some strategies that can help recession-proof your finances.

What is a Recession?

Before we get into how you can recession-proof your finances and protect yourself from this negative economic event, let’s define what a recession is. While not all economists agree on when the country enters or exits a recession, one major indicator that we are in – or are headed for – trouble is when our nation’s gross domestic product (GDP) falls for two consecutive quarters.

A quick look at the Bureau of Economic Analysis website tells us that in the United States, our economy fortunately has yet to meet that criteria. However, in the last quarter of 2022, our GDP was up 2.6%, and in the first quarter of 2023, it was up 1.1%. So, while the economy is still growing by this measure, the growth has slowed.

On top of that, we’re still dealing with high inflation levels and increasing interest rates to combat it. Everything is more expensive – including borrowing money – which some folks have had to do to make ends meet.

As such, some experts predict that the country will be in a recession by the end of 2023. Interestingly, recessions often don’t get labeled until a year after they start. That means we could find ourselves in one without being formally informed of it.

So, what should you do? You should recession-proof your finances now and keep them in that state no matter how the economy performs. That way, you’re well ahead of any money-related crisis and could confidently withstand what would devastate many – potentially long-term unemployment.

How to Recession-Proof Your Finances

There are many things you can do to shore up your financial house. Here’s a roadmap to follow:

1. Review Your Money Situation

First, you need to enter the financial improvement process with clear eyes and updated information. So, gather all of your financial statements and write down how much you:

  • Earn
  • Spend
  • Save
  • Owe
  • Have invested

These numbers sum up your financial health at a glance – and indicate what you need to prioritize. For example, if your credit card balance keeps creeping up, you know you have to earn more, spend less, put extra money in your emergency fund, or some combination of the three.

2. Revise (or Create) Your Budget

Next, it’s time to adjust or create your budget. Whether you have a budget already or you’re starting from scratch:

  1. Write down everything you spend each month by category (housing, food, transportation, shopping, etc.).
  2. Add up your monthly spending, and compare that to your total monthly income.
  3. Cut unnecessary and unfulfilling purchases, and find creative ways to save money on the essentials.

If you earn significantly more than you spend, congratulations! You’re in good shape. However, there’s usually still room for improvement. Consider finding other places to scale back your spending without negatively impacting your quality of life. Examples include negotiating a lower cell phone bill or canceling a subscription to a streaming service you don’t use.

But if you spend more than you earn, you’re quickly heading for disaster. You’re either using savings or taking on debt to cover your costs, which is taking you in the wrong financial direction. In this case, you should probably be more ruthless when cutting expenses in your budget. Now’s the time to seriously scale back on or eliminate discretionary spending on things like dining out, shopping, or vacations.

Pro Tip: When you save money by trimming costs from your budget, immediately give those newfound dollars a purpose. Otherwise, they’ll likely get spent!

3. Earn More Money

Saving money can be a powerful way to get your finances on track, but it’s only one side of the coin. The other side is earning more money. You can only scale back your spending so much, but theoretically, your earning power is uncapped. So when you couple being frugal with increasing your income, you put yourself in the best position to succeed.

Some ways you can augment your cash flow include:

  • Working overtime
  • Seeking a promotion in your current organization
  • Changing to a higher-paying job at a different company
  • Getting a part-time job
  • Starting a side hustle or freelancing
  • Selling some of your belongings

Remember: Put the extra funds towards your goal of recession-proofing your finances.

4. Boost (or Build) Your Emergency Nest Egg

You’re not alone if you can’t cover a $1,000 emergency in cash. According to a recent survey by Bankrate, 25% of those asked would turn to a credit card to cover a surprise expense. That’s worrying.

You should strive to amass a sizable nest egg to help you handle personal crises. Not having one is an emergency unto itself. In fact, the matter is so urgent that you may want to consider stashing some cash away before you tackle other financial goals, like paying off debt. Otherwise, you could easily go further into the red the next time your car breaks down, or you visit the emergency room.

Pro Tip: If you’ve got a healthy emergency fund, you can get right into step five.

5. Pay Down (or Off) Debt

As you save or earn more money, you may want to use some of it to pay off your debt – especially high-interest revolving debt, like credit cards. Getting rid of debt frees up your cash to do other things, like save or invest. Plus, decreasing how much you owe can help your credit score.

There are many strategies you can use to shed your debt. Two popular ones are the debt snowball method and the debt avalanche method. In both cases, you make at least the minimum payment on all your accounts.

However, you choose one account – prioritized by lowest balance (debt snowball) or highest interest rate (debt avalanche) – and put every spare dollar you have towards paying it off. You repeat the process each month until that debt is gone, and then you move on to the next one on the list.

Once you pay off your credit card debt (or if you didn’t have any to start with), you have a decision to make: keep paying off other debt or invest more. It’s a tricky choice.

On the one hand, ditching your debt can be very freeing and make you feel more secure today – especially in uncertain economic times. But on the other hand, contributing to your investment accounts can help you create a better future for the years and decades ahead.

Food for Thought: Some experts advise folks to prioritize investing over paying off low-interest debt like federal student loans and mortgages because they can likely earn a higher rate of return over time. However, it’s your money, so you should do what feels right.

6. Keep Your Investments Steady

When the financial sky seems to be falling, you may panic and want to sell off your investments. But, please, try to resist the urge to do so. In general, investors that stay the course fare better because, historically, the market ultimately rebounds.

Your patience could be rewarded by significant returns during the next economic boom. And, if you have the means, it may be wise to invest additional funds when stock prices are down. Then, you could gain even more financial ground when the nation recovers from the recession.

One caveat: If you’re in or nearing retirement, converting some of your investments to cash might be a good idea. That way, if a recession lasts longer than expected or worsens, you won’t have to sell more stocks at a steeper loss to cover your living expenses.

7. Give Your Career Some TLC

We hope you never lose the job you need. But there are steps you can take now to improve your value in the employment marketplace. That way, you won’t stay unemployed for long. Plus, giving your career some TLC could empower you to make a lucrative professional move on your terms.

Here are some things you could do:

  • Spruce up your resume. It will be ready to go if you need or want to hunt for a new job.
  • Practice interviewing – especially if you haven’t been through one in a while. You’ll feel more confident heading into the real thing.
  • Research companies in your target industry. Then, create a list of firms you may want to work for.
  • Make networking a regular activity. The more people you meet and stay in contact with, the more opportunities you’ll have.
  • Seek training opportunities or go back to school. New skills or a new degree could make you indispensable to your current (or future) employer.

Pro Tip: Consider freelancing or consulting on the side (if your employment agreement permits). If you lose your day job, you’ll still have income and a small business you can grow.

8. Take Advantage of Your Home Equity

If you own your house, chances are good you’ve built up some home equity. That equity could help you weather a financial storm by supplementing your emergency fund.

If you want to tap into it, you could take out a home equity loan or a home equity line of credit (HELOC). Or, if you’d rather not take on more debt, you could explore converting your equity with a sale-leaseback.

With a sale-leaseback, you sell your property at its current market value but can stay in the home as a renter. Many programs have less strict qualification requirements than lenders, making sale-leasebacks accessible to a variety of credit profiles.

Be sure to talk with a financial advisor to learn more about a sale-leaseback and specific strategies you might be able to implement to work towards recession-proof finances.

Key Takeaways

  • Our country may enter a recession later this year.
  • Recession-proofing your finances is a smart move regardless of what happens in 2023.
  • You can do many things to shore up your money situation, such as increasing your emergency fund, paying off debt, and exploring financial programs like a sale-leaseback.

Sources:

  1. Bureau of Economic Analysis. Gross Domestic Product. https://www.bea.gov/data/gdp/gross-domestic-product
  2. Bankrate. Bankrate’s 2023 Annual Emergency Savings Report.
    https://www.bankrate.com/banking/savings/emergency-savings-report/
  3. SmartAsset. What is the Average Stock Market Rate of Return?
    https://smartasset.com/investing/stock-market-rate-of-return
Topics:
Budgeting
Debt Management
Finance
Financial Planning
Recession
Written by Laura Gariepy
Freelance Writer, MBA, and Financial Expert
Reviewed by Meela Imperato
Senior Director of Brand and Content, Real Estate & Finance Journalist
Disclaimer

This article is published for educational and informational purposes only. This article is not offered as advice and should not be relied on as such. This content is based on research and/or other relevant articles and contains trusted sources, but does not express the concerns of EasyKnock. Our goal at EasyKnock is to provide readers with up-to-date and objective resources on real estate and mortgage-related topics. Our content is written by experienced contributors in the finance and real-estate space and all articles undergo an in-depth review process. EasyKnock is not a debt collector, a collection agency, nor a credit counseling service company.